Alfa Laval Corporate AB

Thank you and welcome to the Q1 earnings call. As always, I'll start with a couple of the introductory comments before moving into the presentation. First, the water intake was very strong at 13.3 billion sec, a new all-time high. Demand was good all over the place, but of course it was especially firm in the food and water division with an exceptional organic growth rate of 40% in the quarter. Margins were overall stable on a group level at just above 17%, despite some variations between divisions. As indicated in previous quarters, the operating environment is complex, and some quarterly volatility is to be expected. And indeed, we had some of that volatility on a divisional level in Q1. Finally, As you know, we signed an agreement to acquire this MET, an engineering firm, complementing Alfa Laval in the important growth areas of vegetable oil and biofuels. We expect to close the transaction mid-2022 and add approximately 4 billion SEC at the rounded double-digit market starting from there. So with that, let's go to the key figures. As you've seen, organic growth was strong and solid in Q1 at a rate of 20%. You should be aware that, of course, we have a slightly higher share of price growth in the numbers than we traditionally have had. So we would estimate that the price effect in the quarter is maybe in the area of around 5%. and the volume component somewhere in the neighborhood of 15, for your reference. Sales is going slower than orders related to the disturbances in the supply chain, worsening to a degree. Before, in earlier quarters, we've indicated to you that we were lagging in deliveries approximately around 150 million SEC. Now, in this quarter, we estimate that lag to be in the order of 600 million SEC, and consequently with some effects on sales cost ratio and also in terms of the gross profit from the operations. With that said, profit grew in line with invoicing for the quarter. Then going on the divisional level, starting with the food and water division. As I already indicated, we have an exceptional quarter in the division. with a total order intake at 5.7 billion SEC, with clearly strong demand across all of the end markets of the division. Partly, the exceptional order intake was driven by a large 700 million SEC brewer order that was booked in the quarter. But even without the large order, we would have been way over 20% in the organic growth rate And at 55 billion SEC, it would still have been the all-time high for the division by far. Sales increased, but the supply chain challenges affected invoicing negatively with an increase of the backlog of the late deliveries. In fact, the supply chain challenges are somewhat bigger in food and water and to a degree marine compared to the energy division as a whole. The margin was stable in the quarter. We had positive volume effects. and negative mixed effects, and those two pretty much balanced out in the quarter. Now, in this context, a few extra comments on the Desmet acquisition. We were excited to announce the acquisition a few weeks ago. The strategic rationale for us is to take a further step in building Alfa Laval's position in the energy transition And biofuels is one of several tools that are important for us in our offer towards a decarbonized planet. Combined with Alfa Laval's know-how, we have a complete engineering know-how and product coverage from feedstock to final product. So we will become a very strong company in this area. Our intention is to continue to operate the Desmet brand within the Alfa Laval portfolio offering. And with that, we believe that we are well positioned for a dynamic and growing sector going forward. The running rate of Desmet, we estimate to be in terms of invoicing in the order of magnitude of around 4 billion SEC per year. And we expect that the margin leaving out any synergies or other improvement areas that we may do currently would be at approximately 10%, which mirrors fairly well where Alfa Laval is currently in our engineering business in food systems. Then on to the energy division. We had a positive demand trend that continued related to the energy transition as a whole. Energy efficiency solutions are the main driver. in the growth, but we also had some early signs and bookings within the hydrogen market, and we also see a recovery in the gas sector related to LNG, whereas the traditional oil upstream, downstream remain on a fairly depressed level. The supply chain is relatively stable in the energy division. with invoicing growing pretty much as expected and pretty much in line with the order intake growth. The margin improved significantly in the quarter, supported by volume and also some revaluations effects on the inventory. Going forward, pricing effects should partly compensate for the future absence of further revaluations. As I have indicated to you throughout the quarters, There are many moving components in the results of the group and on the division, and here you have some of those ingredients. Then moving on to the marine division. Despite cancellations of part of the Russian order book amounting to around 500 million SEK, the net orders in the quarter were still on a stable level with a small growth, which indicates and underlying sound market demand. Sales were stable, but supply chain challenges affected shipments in the quarter, not least in relation to our Chinese supply chain where we have substantial industrial activities. We are being challenged by lockdowns, and this will likely continue in Q2. The margin dropped in the Marine Division with several headwinds as a result. The mix was negative, partly driven by the ballast water joint venture and the increasing share of invoicing. We also had deliveries of an old bath block priced at the old conditions. And we have earlier indicated to you that the group margins may be affected by approximately minus 0.5% as a whole. And this quarter, that was mainly affecting the marine part of the business. In all, we are addressing the situation in the marine division, but it will take a few quarters to sort out. Then moving on to service. We had a very strong service quarter with a new all-time high and a 16% organic growth rate. All three divisions had good development, but it was unusually strong in the marine division. Note, when you look at the marine numbers, where for the first time the share of service was 42%, that that mix was a little bit affected by the order cancellation related to Russian orders. Consequently, the more normalized level would have been around 35 or so, which is slightly closer to, let's say, the historic average numbers. All in all, a good quarter for the service business. Returning to the overall order intake situation, as I indicated, a new all-time high supported by large orders, but certainly the underlying demand trends was very positive. In fact, the large orders are a bit more than normal, but not dramatically so. If you want to To get a feel for the pace, you could say that the one-off large brewery order that amounted to around 700 million SEC in the quarter was pretty much balanced out by the write-off of 600 million SEC of Russian-related orders. Those two taken out of the equation leads you to approximately the same level of orders that we actually accounted for in this quarter, 13.3. If you add the Russian parts of it and just look at the gross order for the quarter, we were in fact close to 14 billion SEK. The regional picture, of course, when you have this type of growth, the whole world grows very synchronized. We had a stable situation in China and a much stronger growth path in Southeast Asia than previous quarter. So all in all, Asia was positive. We had a very strong quarter in North America, especially in the US, with usually high growth rates across the board. Europe was good. Latin America was good. And in fact, even Eastern Europe, with the big cancellations in Russia and the pausing of all new Russian orders, we are still ahead when it comes to the order intake in Eastern Europe as a whole, net net. So that is the situation in the market. Let me then in this context give you some final comments on the Russia-Ukraine situation. We have earlier communicated that we are pausing new orders in Russia due to the complex situation and the sanctions. That decision remains in place for now. We cancelled approximately 600 million SEC from the existing order books in Q1 due to the existing sanctions. We have also canceled 200 million SEC in signed but not booked orders in the quarter. So all in all 800 million SEC approximately corresponding to normal business year in Russia. We made provisions of around 330 million SEC to cover for possible costs related to our contractual obligations in Russia. The net assets in Russia amount to only 30 million SEK. So impairment is a minor issue for us going forward. However, we do have 240 employees in Russia, and although we have started a personnel reduction in that process, we may have some restructuring costs related to the personnel situation in Russia, either in Q2 or as we find appropriate, depending on when decisions are being made. So with that, I'd like to hand over to Jan for some further financial comments.

Thank you, Tom. And as usual, we'll jump into the sales picture first. So we expected invoicing in Q1 to be higher than the same quarter last year. We realized sales of $10.6 billion, which is 18% higher than last year. Please note that we had a positive FX translation impact on sales in Q1. And excluding this, sales were up 12%. Invoicing was a bit lower than expected, especially in the food and water division, due to the delayed shipment related to the worsening supply chain situation. We estimate this impact to be approximately 600 million sick in Q1. With regards to sales in Q2, our outlook is as follows. Considering the strong order backlog, Sorry, the increase in order backlog during last year also in the first quarter. I do expect invoicing Q2 to be higher than the same quarter last year. Then we look at gross margin. So the gross profit margin in Q1 came in at 39.1% compared to 38.2% last year. The overall mixed price impact was slightly negative. primarily due to the execution of orders in the marine and energy division that was priced prior to the material cost increases. We had a continued good load and capacity utilization in most of our factories during the quarter. The PPV methods impact was positive in the quarter, mainly because of the one-time inventory reevaluation effect that compensated for higher raw material costs. The inventory reevaluation effect primarily affected the energy division. FX impact was slightly negative in the quarter. And finally, the acquisition of StormG had a positive impact on the gross profit margin. Now, when it comes to the outlook for Q2, the starting point is, of course, the 38.2% reported last year. We expect a slight positive capital sales service mix on a comparable basis. And we expect a continued good load and capacity utilization in our factories with the exception of some sites in China impacted by the COVID lockdown situation there. With regards to the PPV methods impact, as communicated during the CMV, we do expect that we can offset most of the cost inflation with price increases and material price hedges in place. However, part of the opening order backlog in 2022, primarily in marine and energy divisions, was priced prior to the large material cost increases And we expect this order backlog impact to be more visible in the Q2 quarter as the offset from the inventory revaluation effect will be much smaller than in Q1. We do expect also continued slight negative FX impact on the gross profit margin also in Q2. Then looking at the S&A expense development. So our S&A expenses were up 11% in Q1 on a comparable basis. This increased It's reflecting the overall high business activity in the company, the inflationary pressure, but also that we have selectively adding resources in both our current businesses with high growth, but also in some of our more long-term business development areas. We expect to gradually offset the increase in S&A costs by increasing sales volumes as we execute on the large order backlog. The EBITDA margin came in at 17.1%, same as last year, despite major challenges in the supply chain with decreased material and freight costs, as well as larger negative impact on sales caused by delayed shipments. The cost inflation was compensated by price increases, as well as positive volume and revaluation effects, as earlier explained. Then looking at some of the key figures. So on a comparable basis, S&A expenses were up 11%, and R&D expenses were up 3% versus last year, reflecting the overall higher business activity in the company. Excluding comparison distortion items, primarily the provision taken this quarter related to Russia of $327 million, net other cost and income was up $38 million versus last year, which is entirely explained by the higher royalty cost paid to our pure ballots joint venture partner in Marie. Financial net excluding ethics impact was a negative 53 million in Q1 versus 48 million last year. The ethics gains losses were positive 38 million in this quarter versus a positive 191 million last year, giving a total finance net of minus 50 million in Q1 this year versus a positive finance net of 143 million last year. The main reason for the FX impacts in Q1 and last year were revaluation of local cash positions in foreign currencies. The tax rate was 36% in the quarter in line with our guidance. Net income and EPS was slightly lower than last year, primarily due to the provisions related to Russia this quarter, but also due to the positive FX impact on finance net last year. Then looking at the cash flow in the quarter, Cash flow from operating activities was 767 million in Q1, slightly lower than last year. The increase in working capital of 937 million was mainly due to an increase in inventories, partly offset by increasing customer advances. The inventory increase was primarily driven by the volume growth, but also due to the global supply chain disruptions. The operating working capital as a percent of sales is now running approximately 2-3% higher than a more normalized level. Investing activities include a capital investment of 274 million on about the same level as last year. We do expect the capital level to gradually increase in the coming quarters to support organic growth as per previously guided. Financial net paid excluding FX impact was negative 24 million versus a negative 26 million last year. Realized FX gain losses in the quarter amounted to negative 46 million, giving a total finance net paid of negative 70. This means our total cash flow in Q1 came in at 424 million. We have bought back 1.7 million of shares in the company during Q1 and 5.8 million shares since we started the share buyback program last year. This represents 1.4% of total number of shares outstanding at the value of 1.9 billion. The board will ask for a new mandate from the AGM to continue the share buyback program until the next AGM in 2023. However, even under the assumption that the mandate is given from the AGM, we will wait to initiate the share purchases for some time, considering the recent acquisitions. Finally, our net debt position at the end of March stands at 6.5 billion, which is a net debt to you with a ratio of 0.2%. Then looking at FX, so the transaction FX effect on EBITDA in the quarter was a negative 40, and the translation impact was a positive 80, giving a total net positive FX impact on EBITDA of 40 million and a quarter. Looking at the projection for full year 2022, we expect a negative FX transaction impact of approximately 150 million primarily as our average euro-thick hedge rate for 2022 is lower than last year. On the other hand, if the closing rate at the end of March remains, we would expect a positive translation impact that would more than offset the negative transaction impact for the full year 2022. And that leads us to the order backlog. So at the end of March, we had a total order backlog of $26.6 billion. which is 11% higher than at year-end 2021 on a comparable basis due to positive book-to-bill rates of 1.25 in the quarter. The order backlog now represents seven and a half months of LTM sales. And for shipments in the remaining part of 2022, the backlog amounts to 17.3 billion, an increase of 2.8 billion compared to the same time last year. And that leads me to the sales bridge then for the full year. So starting with the sales in Q1, which was 10.6 billion, and then the backlog for shipment in the remaining part of this year is 17.3, adding up to 27.9. On top of that, you will need to make your estimate on change in in-for-out orders and FX translation impact. For your reference, the level of in-for-out orders during Q2 to Q4 21 was 17.4 billion. And with regards to the FX impact, it is, of course, quite uncertain. However, using the closing rate until March, the estimated FX impact in 2022 would be approximately 1.5 billion positive. And by that, I hand back to you, Tom.

Thank you. Then, regarding the outlook, let me first say that the market demand and market situation in Q1 was very strong. the underlying market conditions are expected to remain relatively unchanged in Q2. If I start with the divisional part of it, we expect the demand in the marine division to increase compared to Q1. Now, let me guide you in the fact that in Q1, we canceled approximately 500 million SEC of orders in the marine division. We don't expect that to repeat. And consequently, you could also consider the guidance being somewhat the same or somewhat better compared to the underlying conditions in Q1. So for the energy division, we had a very solid market in Q1. We expect market conditions to remain unchanged positive and consequently our expectations are on that level for the energy division. With the food and water division, the outlook is a little bit challenging. The 5.7 billion is a non-repeat. We grew 40% organically compared to the year before. So sequentially, we do not believe that we will repeat the level that we had. We believe in a in a demand in the food and water that is lower. With that said, we think that the underlying market conditions in the food and water market will remain good and solid. However, you have to consider the Q1 numbers a little bit exceptional compared to even good market conditions. So all in all, that leads to an outlook for the group that is somewhat lower than in Q1 and I just advise you to consider the food and water outlook a bit in the context of an exceptional Q1. So with that we are ready for questions.